Mpact, a paper and plastics packaging maker spun off from Mondi in 2011, continues to struggle in poor trading conditions. But the group has spent substantially on upgrading plant and machinery in the past four years and expects to soon see the benefits on the bottom line.
About R765m has gone on a 35% capacity increase at its Felixton paper mill in KwaZulu-Natal. Another R150m has been spent on doubling capacity at a corrugated packaging facility in Port Elizabeth.
"We hope we are close to the bottom of the business cycle of high investment costs and low returns," CEO Bruce Strong said on Tuesday.
While the group increased revenue by 3.1% to R4.8bn in the six months to June 2017, underlying operating profit of R169m was 47.4% down on the June 2016 profit of R322m. The group’s return on capital employed of 10.6% in the period was substantially down on the 16.7% return in June 2016.
According to Avior Capital Markets, Mpact’s total capital expenditure has been about R2.7bn in the four years to December 2016. About R500m more was spent in the latest period. "The bottom line should be supported meaningfully and sustainably from the capex investment in 2018," said Avior analyst Mpho Mokotso.
Mpact leads markets in southern Africa for recovered paper collection, corrugated packaging, recycled cartonboard and containerboard, polyethylene-terephthalate (Pet) preforms and trays, recycled Pet (rPET), styrene trays and plastic jumbo bins. This enables the group to achieve economies of scale at 42 operating sites — of which 21 are manufacturing operations — in SA, Namibia, Mozambique and Botswana.
Sales in SA accounted for about 89% of total revenue in the latest interim period, while the balance went predominantly to customers in the rest of Africa.
Strong said high port and electricity costs were a challenge to South African exporters. In Mpact’s case, exports amounted to 12%-15% of output. But foreign currency issues prevailed in Angolan, Zimbabwean and Mozambican markets, taking the gloss off sales.
The group had also closed its plastics manufacturing operation in Zimbabwe from December 2016, taking a charge of about R40m. Strong said extensive destocking by customers during a poor December 2016 holiday season had hit sales. Consumers were cautious in a recessionary climate and he expected this to add to challenges in the second half.
Mpact said the interim results reflected challenging trading and macroeconomic conditions. "When compared with the same period last year, profitability was negatively affected by lower sales volumes in the paper and plastics businesses and higher recovered paper costs," the company said.
Scheduled downtime for the Felixton upgrade project, which was due to be completed in the second half of 2017, resulted in lost revenues of R24m.
Increased competition and the effects of drought on fruit packaging had also hit product volumes. Headline earnings per share for the period were 33.9c, plunging from 94.9c in June 2016. Net debt rose to R2.3bn from R1.9b in June 2016.
But Mpact chief financial officer Brett Clark said on Tuesday the company was "comfortable" with its 36.3% gearing level, up from 33.8% in June 2016.